Get Smart: Three Steps to Intelligent Keyword Bidding

A bit of number crunching speaks volumes about the quandary many search engine marketers find themselves in. According to the Search Engine Marketing Professionals Organization (SEMPO), during the past two years spending on paid-placement search engine marketing has increased from $4.7 billion to $8.6 billion, or a little more than 70%. At the same time, search query volume has increased only 23%, according to Nielsen/NetRatings. Because spend is growing faster than query volume, advertisers are spending more on average per query, which translates into costlier keywords.

So marketers with tight budgets may find themselves slipping lower and lower on the search engine results pages, if not off them entirely. But they can’t afford to idly sit by and watch competitors steal market share on their best keywords. This leads to a paradox: They can’t afford to be in search, and they can’t afford not to be in search.

The way out of this paradox is to manage keyword bids intelligently. An intelligent bidding strategy starts by ensuring that you’re making money and continues by looking for ways to increase your profit. It entails 1) knowing the true value of your keywords, 2) managing your bids based on a conversion metric, and 3) proactively adjusting bids to segment your audience.

Calculating keyword value

Smart marketers assess the value of their keywords based on conversions, but many of them don’t look beyond the average value of an immediate conversion. The truth is, however, that a lot of conversions happen well after the initial click.

Indeed, a comScore study released last year determined that, on average, 25% of searchers bought an item directly related to their search query — but of those buyers, 63% converted offline. Of the 37% who converted online, some may have done so at a later date, or from a different computer, or by phone.

You need to understand these lagged conversions and to credit them back to the initial keyword. Only then will you understand the keyword’s true value.

While it’s clear that keywords are more valuable than their immediate conversions, figuring out exactly how much more valuable is tricky. For offline conversions, try tracking how many times your site visitors use your store-locator function on your Website. You can also present special offers with printable coupons that have different codes for different keywords and engines. Putting those two together should give you an estimate of how many searchers are converting offline on a keyword basis.

For phone orders, consider setting up a phone tracking system with different phone numbers or extensions assigned to different keywords. You should also track how many times your searchers visit your “contact us” page. Again, combining these two data sets should give you a rough estimate of your keyword-referred phone conversion volume.

Many of your searchers may download a white paper from your Website or sign up for your e-mail newsletter, and a certain percentage of these users will ultimately convert. Use whatever data you have available on these alternate conversion actions to help you credit an appropriate percentage of these conversions back to their keywords.

You should also take into account the average lifetime value of a customer. And bear in mind that though some keywords may bring in fewer conversions than others, due to order sizes those few conversions may have a greater overall value to your business.

Managing bids based on metrics

Once you know what your keywords are worth, it’s time to figure out parameters for managing them. Let’s start by looking at a couple of common mistakes.

The first is managing by position. Google, Yahoo!, and MSN enable you to request the top position all the time. But while that position will give you the most clicks, those clicks will be expensive, and those clickers may not convert. In fact, you leave yourself vulnerable to the “compulsive clicker,” the person who immediately clicks on the first link he sees without regard to what the link says.

Another common mistake is managing by clicks. Google has an automated bidding manager that will optimize your bids to get you more clicks. The problem is that clicks don’t make you money; they cost you money. Conversions are what make you money. Therefore you should manage your keywords around which ones convert best, in terms of both conversion value and conversion rate.

There are two general approaches here. The first is, if you have a fixed annual budget, to increase your bids on the listings that give you a higher return on investment and to take money away from your poor-performing ones. That will guarantee that for your best keywords you remain competitive on the results page.

The second approach is, if your cost per order (CPO) cannot exceed a certain limit but your overall budget is generous, to look for ways to eliminate waste. With this strategy, as long as you’re meeting your CPO target, your campaign should be profitable. This gives you the opportunity to reinvest your earnings back into your campaign to increase your market share — and a self-funding campaign should be quite attractive to your chief financial officer.

You should also look for opportunities to raise your bids in such a way that your ROI may decline and you may exceed your CPO but you will nonetheless increase your net profit. Let’s say you have a listing that, at position six, has a cost per click (CPC) of $0.50. You get 100 clicks a month, for which you pay $50, and one conversion with a total profit of $500. That’s a CPO of $50 and a 10-to-1 ROI — not shabby!

But what if you double your CPC, to $1.00? Let’s say that gets you to position three and boosts your click volume to 500 a month, costing you $500. If you have the same 1% conversion rate and $500 conversion value, that will result in five conversions for a total profit of $2,500.

Granted, you have a lower ROI at five to one and a higher CPO at $100, but you have five times the net profit you had before. We call that net search profit (NSP). And that may bring an even bigger smile to your CFO’s face.

If you have a long keyword list across multiple search engines and different conversion actions with varying values, you may want to license an automated bid management technology or hire an agency that uses one. A good technology can not only manage bids based on a conversion-oriented success metric, but it can also assign weights to different conversion options.

Let’s say you have one particular keyword that drives some searchers to purchase outright and others to sign up for your e-mail newsletter. You know that one in every four of those who sign up for your e-newsletter will eventually make a purchase. The right technology will count four newsletter sign-ups as one conversion and manage your bids accordingly.

Adjust bids to segment your audience

Any technology that adjusts bids based on a success metric will adjust bids reactively. And reactive adjustments won’t necessarily reflect that not only are some keywords worth more than others but also that each click on a given keyword has a different value.

To really bid intelligently, you must be proactive by sorting through your campaign data to look for patterns around the best conversions. Typically you’ll notice different conversion behavior in different seasons, on different days of the week, at different times of day, in different geographic areas, and if you’re running a campaign on MSN, by different demographics.

To adjust for different seasons, allocate extra money for your peak season and spread your remaining funds evenly throughout the rest of the year. As for time of day, Google and MSN let you automatically boost bids by day part, but this is another area where a sophisticated third-party technology can come in handy.

With Google and Yahoo! you can create a geo-targeted campaign, while with MSN you can boost your bids automatically on searches that occur in your preferred locations. If you’re running a national campaign in Google or Yahoo! and notice that certain keywords perform better in certain areas, you should create campaigns targeted to those areas with higher keyword bids. The engines will show only the most relevant ad, not both.

As you slog through your data, you may find other odd conversion behaviors. Perhaps users of one ISP convert better than those of another ISP, or a certain engine converts better than the others. Again, be prepared to shift your budget around these segmentation parameters. The perfectly segmented campaign will have you in the top position in front of your best searchers and at lower positions the rest of the time.

On a broader level, be prepared not only to shift your search funds around but also to shift your marketing budget among the multiple channels. If your search campaign is performing better than your direct mail campaign, for instance, you shouldn’t wait until the next year’s media plan to reallocate your budget. In the new advertising age, you need a fluid budget that you can move across channels and a system that manages your budget within these channels.

Mark Simon is vice president of industry relations at Did-it, a New York-based search engine marketing and auctioned media management agency.

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